In 2018, the European Securities and Markets Authority (ESMA) started to implement the Markets in Financial Instruments Directive (MIFID II) regulations. Part of the regulations mandated EU members to come with their own specific regulations to make the financial industry safe. Recently, the Cyprus Securities and Exchange Commission (CySEC) released its proposals on a range of issues that are intended to protect retail customers and financial services companies. On leverage, the commission opted for a tiered system, which is seen as being favorable to both retail traders and financial services companies.
On leverage, CySEC offered a risk-based approach, which is in line with the ESMA guidelines. In this, companies will need to categorize their customers based on a range of criteria like net worth, annual income, experience in the market, and the knowledge of volatility. The clients will then be placed in three tiers, which are ‘positive’, ‘negative’, and ‘grey’. Those in the positive tier will be allowed to use a bigger leverage. The sale of financial products to those in the negative category will be rare because they are at higher risk of losing their investment. According to CySEC, it will limit the leverage on clients who fall within the grey area.
Those in the ‘positive’ tier will be required to earn a minimum of €40,000 and have net liquid assets of at least €200k. These will receive the maximum leverage of 50:1. Those in the ‘grey’ tier will have a maximum leverage of 20:1.
In addition to these, the commission proposed that leverage should be limited to range between 50:1 and 1:1. It also proposed the introduction of a margin close out and negative balance protection. Firms will be prohibited to offering cash and other inducement to attract retail customers. They will also be required to have standardized risk warnings.
The regulations set to be implemented will curtail the business of binary options and restrict the trading of volatile assets like cryptocurrencies to traders in the upper tier.
As the deadline of the implementation of these regulations nears, companies will need to ensure that they have measures in place to ensure compliance. As the original MIFID regulations stated, companies will need to invest in internal compliance officers, who will work to ensure that all products they offer are in line with the regulations. Many companies are also opting for external companies that help to promote compliance as well as other financial and legal services.
At the International Financial Services Advisors (IFSA), we are experts in the financial services industry. With more than 18 years in the industry, we help companies, large and small solve complex problems. We also provide regulatory preparation and ongoing coverage, so that the brokers can be sure that they are in compliance with all the regulatory demands.
Regulators in Europe have a valid reason to be strict about financial regulations because most retail traders lose money. This leads to financial losses to financial brokers too. However, the ongoing phase of over-regulation means that companies must always be ahead of the curve in ensuring compliance. At IFSA, we are market leaders in that and have the track record to show for it.